General Motors Co. (GM:US) reached its highest share price in 10 months after saying it will purchase $5.5 billion of its stock from the U.S. Treasury, moving the government a step closer to ending the controversial bailout of the auto industry.
GM rose 6.6 percent to $27.18 in New York, the highest closing price since Feb. 17. The company will buy 200 million shares for $27.50 each, a 7.9 percent premium over yesterday’s $25.49 close, GM said today. Treasury will still hold about 300 million shares, or 19 percent on a fully diluted basis, after the transaction and plans to sell its entire holding within 15 months, the automaker said.
The deal for 13 percent of the automaker’s stock helps the Obama administration recoup part of the $49.5 billion invested in GM, the biggest piece of an industry bailout that became a centerpiece of President Barack Obama’s first term in office and that drew criticism from Republican opponents. Cutting the stake could be good for GM’s image and its stock.
“It’s going to materially lift an overhang that’s been over the stock,” Peter Nesvold, a Jefferies & Co. analyst in New York, said in a phone interview. “There’s been this nagging fear anytime the stock gets closer to $27 or $28 where the chatter about the government sell down picks up again.”
The shares have gained 34 percent this year and are 18 percent lower than the company’s initial public offering price of $33 each. The U.S. needed to sell its shares for more than $50 each to break even on the GM bailout.
U.S. ownership “put an uncertainty discount into the stock price that was offsetting some of the positives of the company,” said Jim Kee, president of South Texas Money Management in San Antonio. “But now that the government plans to exit, that will mean that GM’s decisions are GM’s and not driven by any other considerations that might not be shareholder-focused.”
South Texas Money Management purchased 500,000 GM shares in February expecting a 30 percent to 50 percent gain on the auto recovery.
Treasury said it plans to begin selling its remaining shares as soon as January. The sale announced today represents 40 percent of the government’s remaining stake after the 2009 bailout and 2010 IPO. GM said it expects to record $400 million in costs this quarter because of the transaction, which it expects to close this year.
“We applaud GM management for unlocking shareholder value by releasing excess capital and beginning a resolution of the government stake overhang,” David Einhorn’s hedge fund Greenlight Capital Inc., which owns 21.6 million GM shares, said in a statement.
The bailouts of GM and Chrysler Group LLC by U.S. and Canadian governments propped up a light-vehicle industry that has since reported three straight years of at least 10 percent growth. GM received $49.5 billion from the U.S. in 2008 and 2009 as part of its restructuring, Treasury said today. Taxpayers still owned 32 percent (GM:US) of the company before today.
The “Government Motors” tag stemming from the 2009 bailout dogged GM throughout this year’s presidential campaign. Obama defended the U.S. aid as he campaigned successfully for re-election. Republican candidates, including nominee Mitt Romney, had criticized it.
For the automaker, the transaction is a way to move past the political controversies.
Good for GM
“It’s obviously good for the business in terms of continuing to remove the perception of government involvement in the company which is going to be good for sales,” Chief Financial Officer Dan Ammann told reporters at the automaker’s Detroit headquarters today. “This is very attractive to the company, to our shareholders. It obviously brings some clarity and certainty to the U.S. Treasury exit.”
The Treasury Department, in a statement, said it was time to exit the GM stake.
“The auto industry rescue helped save more than a million jobs during a severe economic crisis, but TARP was always meant to be a temporary, emergency program,” Timothy Massad, an assistant secretary, said in the statement. “The government should not be in the business of owning stakes in private companies for an indefinite period of time.”
The Treasury last week sold its last 234.2 million shares of insurer American International Group Inc. (AIG:US), marking the end of the rescue more than four years after the U.S. took over the company to save the global economy. Proceeds from the sale boosted the U.S. profit on the AIG bailout to $22.7 billion.
The Congressional Budget Office estimated in October that the Treasury’s Troubled Asset Relief Program, which bailed out companies including AIG, Citigroup Inc. and GM, will cost taxpayers $24 billion, down from an estimate of $109 billion in March 2010.
The Treasury’s most recent estimate of the cost to taxpayers for its rescue of GM, Chrysler and Ally Financial Inc. (ALLY:US) was $24.3 billion as of Sept. 30. The department updates the figure on a quarterly basis.
In Canada, Finance Minister Jim Flaherty said that government hasn’t decided when it will sell its GM shares.
“We will not have a fire sale, we will not sell the shares without getting the best value we can for Canadian taxpayers,” Flaherty told reporters today in Burlington, Ontario. “We are a Conservative government, we are not interested in the long term in being shareholders in private corporations.”
The GM-U.S. Treasury transaction doesn’t affect the company’s creditworthiness, Standard & Poor’s said in a statement. The cash used is within the automaker’s liquidity and Treasury’s eventual exit removes uncertainty, S&P said.
“As today’s news travels around the world, the question will be asked, ‘Did GM truly learn the lessons of the bankruptcy?’” Chief Executive Officer Dan Akerson told employees in a memo today. “Our results show that we are changing the company so we never go down that path again.”
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